Medical costs are on the rise, putting at risk state’s efforts to tie health spending growth to economy

Mergers, changes in care alter picture

After several years of moderating costs, there are signs the rate of increase in Massachusetts health care prices — and insurance premiums — may soon start accelerating again, exceeding a heralded cost cap set by the state last year.

Three factors are threatening to push residents’ annual health care costs up faster than the state’s overall rate of economic growth:

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First, health insurers in Massachusetts estimate the “medical cost trend” — an industry measure based on the price of services and the volume of doctor visits, procedures, and tests — will rise between 6 and 12 percent this year. That would be more than double the state’s anticipated rate of economic growth.

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Second, organizers of new insurance-buying cooperatives, formed to enable small businesses to band together and negotiate discounts from health plans, say new federal rules will supersede Massachusetts regulations that qualify small businesses for discounts. That will probably drive up premiums for companies with fewer than 100 workers.

Finally, a string of hospital mergers — most recently, Beth Israel Deaconess Medical Center’s deal to acquire Jordan Hospital of Plymouth, as well as the proposed alliance of Partners HealthCare System with South Shore Hospital in Weymouth — raise the prospect that formerly independent community hospitals will have the clout to command higher medical reimbursements.

Reining in health expenses has been a top priority for Massachusetts officials, who view it as a pressing follow-up to the 2006 state law that created near-universal access to health insurance. Governor Deval Patrick last year signed legislation limiting the annual per-capita increase in health care costs to the state’s economic growth, projected to be 3.6 percent in 2013. The measure was applauded by business and consumer groups. Now, there is mounting skepticism about the chances of avoiding a higher increase.

“This goal is completely untested,” said Lynn Nicholas, president of the Massachusetts Hospital Association. “It’s being used for the first time anywhere. This is like turning around a giant tanker in a short amount of time. People totally underestimate how difficult that is.”

Richard C. Lord, a member of the state’s new Health Policy Commission and president of Associated Industries of Massachusetts, a trade group representing about 5,000 employers, said the law does not specifically penalize health care organizations that go over budget. It also lets providers and insurers off the hook in the event the state does not meet its target by calling for public hearings to identify and address the causes of rising prices.

“Nobody thought this was going to be easy,” Lord said. “We set an ambitious target for slowing the rate of growth in health spending. Whether we can meet it, it’s too soon to tell.”

Health care leaders in other states are closely monitoring the effort to control costs.

“People around the country paid a lot of attention to the Massachusetts health care reform in 2006,” said Ric Gross, market analyst for the research firm HealthLeaders-InterStudy, based in Nashville. “People will be watching what happens with this payment reform, as well.”

There are some trends working in the state’s favor. Data released by the Congressional Budget Office last month showed health care spending is growing nationally at the lowest rate in decades. Among the reasons: moves toward more coordinated health care by doctors and hospitals, and changes in insurance products and payment models.

Massachusetts has been at the forefront of those changes. Providers have been grouping themselves into so-called accountable care organizations to manage the care of patients within budgets. At the same time, insurers have been shifting providers toward fixed payments, rather than reimbursing them for every test and procedure. And more employers are offering coverage that allows them to save money by restricting where employees can get care or requiring workers to pay more for expensive doctors and hospitals.

Such factors helped push down average base rate premium increases to 3.6 percent for the first quarter and 2.7 percent for the second quarter in the most regulated segment of the state’s insurance business — the market serving small businesses and individuals.

“Based on the small-group market, there are still reasons to be hopeful that we as a state can reach the [3.6 percent] benchmark for this year,” said Barbara Anthony, the Massachusetts undersecretary of consumer affairs and business regulation. “The benchmark is not something we should be striving to reach. We should be striving to be under it.”

But the benchmark wasn’t even discussed at a Feb. 6 market outlook seminar in Waltham hosted by the New England Employee Benefits Council. Speakers included representatives of the state’s nonprofit health plans that do substantial business with small employers and individuals, as well as national health insurance carriers serving mostly larger businesses in Massachusetts.

While the nonprofits tended to predict somewhat smaller price hikes on the horizon, almost all insurers said the medical cost trend — which fell from between 11 and 12 percent in 2010 to between 6 and 8 percent last year — will rise again.

They cited a bad flu season in Massachusetts and more demand for medical services from people who delayed visiting doctors or getting elective procedures during the recession. Premiums would not necessarily rise as fast as the medical cost trend, but the two are closely related.

“We expect there’s going to be a continued rise in [health care] utilization simply because we in Massachusetts are getting older,” said Mim Minichiello, senior partner at the Newton insurance brokerage EBS Capstone. “Then you have the second factor of the pent-up demand, which will increase utilization in the next 12 to 24 months.”

State officials have yet to specify how the 3.6 percent cap will apply to contract negotiations between insurers and health care providers, which will be key to its success.

“It needs further definition from the regulators,” said Matthew Fisher, chairman of the health law group at the Worcester law firm Mirick O’Connell.

Small businesses were anticipating relief from premium increases through a state law passed in 2010 that let them forminsurance-buying cooperatives that could qualify for discounts by offering employees wellness incentives. But rules released in November under the federal overhaul trump the Massachusetts rating factors by which the co-ops had hoped to gain parity with larger self-insured organizations.

The result is that a US law intended to increase fairness in health care will make it more unfair — and expensive — for small employers, said Jon B. Hurst, president of the Retailers Association of Massachusetts, which launched the state’s first insurance co-op last year.

Hurst and Peter Forman, chairman of the Massachusetts Association of Chamber of Commerce Executives, met with federal officials in Washington, D.C., on Feb. 15 in an effort to gain a waiver from the federal law. Officials soon after denied the request.

“This is pure discrimination against employees of small businesses,” said Hurst, who still hopes the federal law can be amended by Congress. “The whole thing is ironic and tragic. There’s no question this is going to lead to higher premiums. A lot of small businesses may be looking at 20 percent [premium] increases next year. That makes the 3.6 percent goal virtually impossible.”

Officials at the US Center for Medicare and Medicaid Services, which said it lacked the authority to grant a waiver for Massachusetts cooperatives, did not respond to a request for comment.

Meanwhile, the faster pace of hospital consolidation is making state government and insurance officials nervous. US Department of Justice officials have been evaluating what effect Partners HealthCare’s plan to purchase South Shore Hospital could have on costs and competition. Beth Israel Deaconess’s agreement to acquire Jordan Hospital, unveiled in January, adds to the concern. If both deals are approved, more care on the South Shore would be provided by hospitals owned by academic medical centers in Boston.

Executives at Partners and Beth Israel Deaconess insist their intention is to lower costs by providing more care at community hospitals rather than at Boston teaching hospitals.

“Every health care provider will have to focus on quality and efficiency,” said Beth Israel Deaconess’s chief executive, Kevin Tabb. “We will see [reimbursement] rates stay stagnant or decline over time.”

Others, however, note that whenever the number of companies in an industry shrinks, the remaining players can command higher prices.

“At some point in the end game, the question is whether all the surviving players have enough leverage that they can apply some pressure” on insurers to win higher health care reimbursements,” said Steven J. Tringale, the president of Tringale Health Strategies, a consulting firm in Boston.

Insurers will be closely watching what the mergers do to costs.

“We’re expecting a lot of pressure on prices from hospitals,” said Andrew Dreyfus, chief executive of Blue Cross Blue Shield of Massachusetts. “If the combined entities use their market power to raise prices, it could subvert our affordability efforts.”